Claim of Warranties Failing Their Essential Purpose in LOT v. Boeing

In August, 2021, Polskie Linie Lotnicze LOT S.A. (LOT) filed its 143-page complaint against The Boeing Company (Boeing).  There were twelve claims, most of which were dismissed on an earlier motion.  In February, the U.S. District Court for the Western District of Washington ruled on a motion to dismiss the claims relating to implied warranties of merchantability and fitness for a particular purpose. 

Image by Aka The Beav from Seattle, Washington, CC BY 2.0 via Wikimedia Commons

LOT leased fourteen Boeing MAX 737 aircraft.  Five were delivered before the Boeing MAX 737 was grounded because two of the jets crashed.  Boeing represented that the main advantage of the new jet was fuel efficiency.  According to the complaint, it failed to disclose that the new design would "change the aircraft's center of gravity; decrease aircraft stability; negatively affect flight handling characteristics to make the aircraft more susceptible to the catastrophic risk of aerodynamic stall; and create inherent safety risks."   There were allegedly faulty disclosures both to the FAA and to operators such as LOT relating to the aircraft's Maneuvering Characteristics Augmentation System ("MCAS"), problems with which may have contributed to the two crashes.  In a deferred prosecution agreement, Boeing admitted to having conspired to defraud the FAA.  The MAX 737 was not re-certified for flight until January 2021.

LOT claims that it suffered $250 million in damages due to the aircrafts' grounding.  It claims that the losses continue.

 The Aircraft General Terms Agreement  entered by Boeing and LOT's lessor, included an "exclusive" express warranty that the aircraft would be delivered free from defects in material or design. It appears that Boeing provided as the exclusive remedies available to the lessor the ability to return the planes for repair.  Boeing disclaimed consequential damages relating to warranties associated with the planes. 

LOT argued that the limitation caused the warranties to fail of their essential purpose because of how long the planes were grounded and because of Boeing's misrepresentations regarding MCAS.  In addition, LOT claimed that the limitations were unconscionable because Boeing's "gross negligence" caused the planes to be grounded for two years.  All of this follows from UCC §2-719(2) and (3), but the court mentions the UCC only in passing, and it doesn't mention §2-719(3) at all, which is troubling.   

There are some wrinkles here that the court does not acknowledge, perhaps because they are not relevant in this jurisdiction.  Some courts require that both tests in §2-719 be met -- that is, a warranty cannot be limited if the limitation both causes a remedy to fail of its essential purpose and enforcement would be unconscionable.  In addition, some jurisdictions treat §2-719 as relating to limitations on warranties but not to exclusions of consequential damages (see, e.g., Sheehan v. Monaco Coach Corp, footnote 4).  If that is true, a disclaimer of consequential damages can survive even if the warranty otherwise fails of its essential purpose.

The court rejected Boeing's argument that LOT should not be permitted to create a warranty claim by alleging fraud.  At this point in the litigation, it is unclear whether LOT will succeed on its warranty claim.  It ought be be permitted to plead in the alternative and retain its warranty action in case the fraud claim does not succeed. 

The court rejected LOT's unconscionability argument, finding that the parties engaged in extensive negotiations, and there were insufficient facts alleged t0 prove substantive unconscionability.  I find the court's discussion confusing, as the extent of the parties' negotiations has nothing to do with substantive unconscionability, but it would seem to negate any claim to procedural unconscionability.  The court defers judgment on the exclusion of consequential damages, which suggests that it may be open to an argument that the exclusion is unenforceable.  On what grounds?  

Well, perhaps on the ground that the remedy would fail of its essential purpose if Boeing were permitted to give operators such as LOT repeated assurances that the aircraft would soon be useable while disclaiming any damages resulting from any reliance of those assurances.  The court found the complaint's allegations "debatable but plausible" and allowed the warranty claims to go forward on that basis.  

While Boeing claimed that implied warranties did not run to LOT, Washington law "activates" implied warranties when an express warranty fails.  As a result, LOT's claims for breaches of implied and express warranties both survive.  The court does not detail the nature of the claim for a breach of an implied warranty of fitness for a particular purpose, and I would have been interested to see what about LOT's use of the planes was "particular" as opposed to ordinary.